A judge in New York issued an order for plaintiff’s counsel (PC) to show cause why sanctions should not be entered against him for filing a Fair Debt Collection Practices Act (FDCPA) without good faith. In Abreu v. Receivables Collection Services, LLC, No. 1:18-cv-4103 (E.D.N.Y. Apr 26, 2019), the court unravels PC’s story about advancing a “novel legal claim” in the Second Circuit and instead suspects that “other reasons” motivated the lawsuit, specifically “obtaining a nuisance-value settlement from Defendant.”
Factual and Procedural Background
The case stems from plaintiff’s medical debt, which was credit reported by Receivables Collection Services, LLC (RCS). Plaintiff retained a credit repair organization, which reached out to RCS to dispute the debt on plaintiff’s behalf. RCS’s representative responded that the dispute would be noted, but if plaintiff wanted the dispute to appear on her credit report, she would have to dispute it with the credit bureaus directly. RCS’s representative later called back and stated that RCS would report the dispute directly to the credit bureaus.
Plaintiff, through her counsel, filed an FDCPA claim against RCS in state court alleging that RCS provided a false statement when it initially said it would not report the dispute directly to the credit bureaus. RCS sent a letter to plaintiff stating that the claim is without merit and that it needed to be dismissed. When plaintiff did not dismiss the complaint, RCS removed the case to federal court and notified plaintiff of its intent to file a motion to dismiss. Plaintiff then voluntarily dismissed the claim, and at the same time Defendant moved for sanctions.
Novel Legal Claim? Not So Fast
Responding to the sanctions motion, PC alleged that the suit was filed in an attempt to bring a novel legal claim before the Second Circuit. The claim is based on a prior ruling by the Seventh Circuit, which states that communications between debt collectors and third parties are protected by the FDCPA. The court took several issues with this argument.
First and foremost, the court noted that this specific argument has been rejected by several district courts within the Second Circuit already. The court recognized that district courts are not bound by other district court opinions. However, the court took a big issue with PC failing to disclose the relevant, unfavorable rulings to the court, especially since PC was counsel of record on those cases.
Second, the court found that PC’s actions were not consistent with the argument that he was trying to advance a novel legal claim to the Second Circuit. For example, the case was originally filed in state court and, had RCS not removed it to federal court, the case would not have found itself anywhere near the Second Circuit’s bench. Voluntarily dismissing the cases is also inconsistent with this intent, since the only way a novel legal claim can be brought before the Second Circuit is if there is a judgment at the district court level. Instead, the court suspects that PC brought the claim in order to shake down the debt collector for a nuisance-value settlement.
Third, the court found that even if the third-party communication argument was novel, the actual FDCPA claim lacked merit. Specifically, the court noted that there is no affirmative duty to update the credit bureaus about the status of the consumer’s debt in this jurisdiction, the only requirement being that “if debt collectors choose to discuss a consumer’s debt with a third party, they must inform that third party of the disputed nature of the debt.” Even in a hypothetical situation where there is an affirmative duty to do so, the court found that RCS’s actions would be protected by the bona fide error defense.
The court declined to sanction the plaintiff, finding that it would be wrong to punish the plaintiff for his or her attorney’s wrongdoing unless plaintiff was part of the scheme (in this case, plaintiff was not). However, the court was troubled by PC’s actions and issued an order for PC to show cause as to why the court should not sanction him.
There is a litigation dilemma within the debt collection industry. Since debt collectors do not get to recover their defense fees even if they succeed on the merits on FDCPA claims, the decision to fight a lawsuit becomes difficult. With the high volume of lawsuits filed by the plaintiffs’ bar against debt collectors, it is nearly impossible for debt collectors to defend each and every one—plaintiffs’ counsel know this and, as shown by the decision above and dicta in other court decisions out of New York, the courts are catching on. It’s one thing to file a lawsuit against a debt collector who has truly done something amiss; it’s a completely different beast when troves of hyper-technical, nuanced lawsuits are filed against debt collectors who are genuinely trying to comply with the outdated, gap-filled laws and regulations that currently govern the industry. Since the courts are taking notice (and are showing exasperation with their dockets being clogged by such claims), debt collectors should stay vigilant and take the opportunity to bring these issues to light.